Editorial: European bank shares slid earlier this week as investors became increasingly worried about banks’ ability to pay coupons on so-called coco bonds, or contingent convertible bonds – bonds that turn into equity if a certain trigger event is taking place.
The Financial Times Lexicon refers to them as “a form of capital that regulators hope could help buttress a bank’s finances in times of stress” because they could “provide a shock boost to capital levels and reassure investors more generally”. It is ironic that these bonds have resulted in precisely the opposite.
The share prices of the likes of Deutsche Bank, Credit Suisse and UniCredit slipped as investors’ faith faded, so much so that Germany’s finance minister Wolfgang Schäuble had to make clear he has no concerns about Deutsche Bank.
Illustration by Ben Jennings
Bank shares including those cited above have since rallied, but the jitteriness may have served as a reminder to many trustees that markets are an unreliable friend – one who lets you down as often as they pick you up.
Schemes in the UK have taken that on board. Since 2006, they have gradually reduced their equity allocations, according to the Pension Protection Fund and the Pensions Regulator’s latest Purple Book; this should protect them somewhat from the impact of a tumbling FTSE, for example.
However, it remains to be seen whether the fixed income spectrum, where many have moved their assets, is any more reliable than stock markets. As more countries are moving into negative interest rate territory, the idea that this could happen in the UK becomes gradually more plausible.
The effect this would have on yields would be, shall we say, an unwelcome development for investors such as pension funds.
In countries where rates are negative already – Japan and Switzerland, for example – pension funds are moving into private equity and infrastructure to offset the loss of income on bonds.
It will be interesting to see whether a move to real assets by UK pension schemes will pick up speed as bonds and traditional equities are once more a source of concern.
Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWK and the team @pensions_expert.
